Zumtobel Group's (VIE:ZAG) Returns Have Hit A Wall

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Zumtobel Group (VIE:ZAG), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Zumtobel Group, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.084 = €55m ÷ (€1.0b - €362m) (Based on the trailing twelve months to October 2021).

So, Zumtobel Group has an ROCE of 8.4%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 12%.

See our latest analysis for Zumtobel Group

In the above chart we have measured Zumtobel Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Zumtobel Group here for free.

So How Is Zumtobel Group's ROCE Trending?

Over the past five years, Zumtobel Group's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Zumtobel Group doesn't end up being a multi-bagger in a few years time. This probably explains why Zumtobel Group is paying out 33% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

The Bottom Line On Zumtobel Group's ROCE

In a nutshell, Zumtobel Group has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 53% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Zumtobel Group has the makings of a multi-bagger.

One more thing, we've spotted 1 warning sign facing Zumtobel Group that you might find interesting.

While Zumtobel Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.